There's just no comparison between a foreclosure or walk-awayfrom a $5.4 billion Manhattan 56-building complex and a defaultedloan on a small retail space in a strip mall.

That's one way to look at how mega banks and other lenders aregrappling with the commercial real estate downturn compared to thebusiness that credit unions do on a much denser scale. For the pastyear, economists and mortgage trade groups have been watching theCRE sector, predicting that while its losses may not be on the samelevel as the residential housing bust, the shortfall could furtherhamper efforts toward a recovery.

Earlier this year, all 12 of the Federal Reserve districts,which include major cities such as Atlanta, New York and SanFrancisco, reported a continued decline in commercial andindustrial space bogged down by rising vacancy rates and fallingrents. Around the same time of the Fed report, a real estatedevelopment company walked away from what is considered to be thebiggest deal in U.S. history. According to published reports,Tishman Speyer Properties turned over a 56-building, 11,232-unitapartment complex in Manhattan to its lenders after defaulting onnearly $4.4 billion in debt. The property was purchased in 2006 for$5.4 billion and is now underwater by about $1.8 billion.

It's safe to say that for credit unions, those numbers areunattainable and probably with good reason. With a fewexceptions-and those CRE deals tend to fall in the multimilliondollar range-the industry has a reputation for closing much smallerloans. As a result, they may not be bracing for the wave of CREloans expected to come due this year in an environment rife withgrowing foreclosures and lately, less of a stigma to simply walkaway from underwater properties.

“The credit union industry is buffered by the fact that we havetypically smaller, more conservative, plain-vanilla type of deals,”said Larry Middleman, president/CEO of CU Business Group, abusiness lending CUSO in Portland, Ore. “The things that are makingheadlines are the Silicon Valley high rises that are vacant oralmost vacant. For the most part, credit unions are not going to bein on these kinds of deals.”

Of the 325 credit unions that CUBG works with, most haveproperties such as office complexes and single-purpose spaces likebowling alleys. A small building with eight tenants, for instance,is much more of a typical CU loan, Middleman said. If one of thosetenants leaves, there's still some room for renegotiation ratherthan worrying about whether the entire space will go intodefault.

Still, the predicted CRE collapse is so dire that last Novemberbank regulators concerned about the nonstop drop in rental andoccupancy rates issued new guidelines for loan workouts. Accordingto the FDIC, CRE loans represented 14% of all loans and leases fora total of $1.1 trillion as of June 2009.

One piece of good news for credit unions is they still have lowdelinquency and charge-off rates on business loans compared tobanks. According to NCUA data compiled by CUBG, 50% ofdelinquencies were concentrated in 18 of the 698 credit unions thathold 95% of all MBL dollars as of June 30, 2009. Nearly 230 ofthese CUs had zero delinquencies. A similar trend rings true forMBL charge-offs, with only 23 CUs having greater than $1 million inMBL charge-offs. The business lending CUSO also found that $83million or 91% of all charge-offs is concentrated in the portfoliosof just 100 CUs.

The low-hanging fruit for cooperatives tends to be in investmentreal estate, said Kent Moon, president/CEO of Member BusinessLending LLC in South Jordan, Utah. He said it's an “overinvestment”that may show early signs that a bubble could burst as foreclosuresmount.

“As the market deteriorates, the lending community has tocontinue to mark down their recovery potential,” Moonexplained.

This recession is significantly different from the one in theearly 1980s when, after the oil embargo, stagflation set in, Moonsaid. The current downturn was created when certain regulatoryissues went unaddressed, he added. The real estate collapse hadmore to do with mark to market, an accounting concept that requiresa lending institution to downgrade capital based on the ability torecover pledged assets on loans. Moon said he believes the answeris new regulation of accounting principles and practices.

“They have to be corrected so that we have a system that doesn'tdrive down capital,” Moon said. “Because mark to market continuesto erode a lender's ability lend, real estate owners are not ableto recapitalize. It's a vicious cycle.”

Meanwhile, credit unions, which have been very effective inweathering the recession, have to maintain a philosophy of stickingwith long-term resolutions, Moon said. That may mean being veryproactive, watching for danger signals and moving in quickly to doevaluations of things like cash flows to come up with a solutionthat will help both the member and the credit union. Deferments andinterest rate and payment reductions and weekly monitoring alsohelp. Small businesses are divided into early, middle and largephases. It's usually in the early stage when a business will tendto lease space. This is where many of the defaults have occurred,Moon said.

Some of Member Business Lending's clients have been onresolutions plans for the past 24 months and are now in a healthycondition, Moon said. The CUSO's delinquency rate has gone up from2.7% to 5%, Moon noted. However, its loss rate “has always beensustained at only half of the national average.” He said “it showsthe resolution approach does work.” Just as important is keeping upthe psychological and mental health of members, Moon said.

“Don't move in with an adversarial approach. What we find isthat members are deeply grateful and nearly all have returned tohealthy conditions. In the end, it helps members, it helps creditunions and the nation as a whole.”

–[email protected]